In the United States, not-for-profit organizations enjoy a special status. Legally, they may apply for tax exemptions, and they tend to enjoy freedom from antitrust scrutiny. In addition, many people believe that it is more socially useful to work at a nonprofit than to work for a for-profit enterprise.

Too many Americans have a romantic view of nonprofits. People on the right view nonprofits as a civil-society bulwark against big government. People on the left think that profit is inherently bad, and therefore they view nonprofits as inherently good. Both views can be questioned.

As James Piereson has pointed out, rather than acting as a countervailing force vis-a-vis government, nonprofits have evolved into full-fledged participants in state corporatism. Large nonprofits in the health and education sector cultivate government subsidies. Many small nonprofits rely on government grants as their primary source of revenue.

When people equate nonprofits with social benefit, they are applying the intention heuristic. That is, they presume that because the intention of the organization is to promote charity, education, health care, or the arts, and because no income is distributed to shareholders, then nonprofits must be good. This is not the case.

For-profit firms ultimately are accountable to customers, while nonprofit enterprises are only accountable to donors. As a result, consumers are consistently over-charged and ill-served in sectors that are dominated by nonprofits. The largest nonprofit enterprises in this country are in the education and health care sectors, which account for a large and increasing share of GDP. College tuition and hospital prices are notoriously high, and increases in these prices have far exceeded those in the overall Consumer Price Index.

We should not elevate nonprofits to a higher pedestal than that of for-profit firms.

Cities that were formerly manufacturing centers, such as Rochester, Cincinnati, and Pittsburgh, are now increasingly dominated by giant hospital conglomerates. These enterprises suppress competition by buying up smaller hospitals. As in any business, these mergers raise costs to consumers. In a recent book on the health care industry, Jonathan Bush and Stephen Baker report that between 2007 and 2012 there were 551 hospital mergers.¹ They point out that these mergers give the behemoths negotiating leverage, forcing insurance companies to pay their high prices.

Or consider universities. When I was growing up in suburban St. Louis, Missouri, Washington University was a modest college campus on the edge of a large city. Today, St. Louis appears to be a modest city on the edge of a large college campus.

The building boom is not the only reason that college tuitions are skyrocketing. Salaries for professors have soared. The University of Maryland economics department, which does not even make the top 20 in the US News and Report rankings, has 30 — 30! — professors paid more than $100,000 a year. Even so, as with other universities, the rise in compensation for professors at the University of Maryland is exceeded by that for administrators, many of whom are paid more than $250,000 annually. Much of the bloat in universities is paid for by student loans and other government subsidies.

Colleges charge ever-higher tuition while quality remains dubious, at best. Although standardized testing is widely used in K-12 education to assess whether schools are achieving results, attempts at objective measurement of student achievement are resisted at the college level. However, the Collegiate Learning Assessment, administered to samples of students at about 200 colleges every year, found very little learning as students progress through college. Many students graduate with large debt loads and end up in jobs that do not require a college education — or without any job at all.

In short, nonprofit universities and hospitals are every bit as eager to gouge consumers as are profit-seeking businesses. However, profit-seeking firms tend to be checked by competition and regulation. The nonprofits are less restrained in their ability to exploit their consumers, thanks to society's coddling, including government subsidies and lack of anti-trust enforcement. Mergers among nonprofit hospitals should be drawing anti-trust scrutiny, as should the tuition and admissions practices of nonprofit colleges. Both hospitals and colleges are able to charge outrageous prices in part because taxpayers bear a large share of the cost of health care and of higher education.

Mergers among nonprofit hospitals should be drawing anti-trust scrutiny, as should the tuition and admissions practices of nonprofit colleges.

The intention heuristic is to evaluate at an action, person, or institution in terms of its stated intention: if the intention is good, then it is good. Instead, we ought to evaluate outcomes. If you do that, then you will find that the small-business sector produces more socially desirable outcomes than the large nonprofit sector. Small businesses tend to reward owners who are diligent and resourceful. They force large firms to compete on the basis of price and quality. Some small businesses are particularly innovative and successful, and these fast-growing firms provide much of the job creation and dynamism in the economy.

For-profit firms are accountable to customers and subject to the discipline of competition. Nonprofits need only please their donors to remain in existence, regardless of whether they effectively serve their mission.

Any change in the tax status of nonprofits raises difficult issues. For example, the longstanding policy of not taxing religious institutions is viewed by many as an element of the separation of church and state. However, apart from religious institutions, I would advocate that nonprofits be subject to the same taxes as for-profit firms. In particular, I believe that exempting hospitals and universities from real estate taxes gives these institutions an unfair advantage in expensive urban areas.

Other tax issues might be moot if instead of taxing income or profits we shifted to a tax on the consumption of goods and services. Such a tax system would place profit-seeking firms and nonprofits on an equal footing. It would continue to exempt donations from tax, but it would equally exempt other forms of saving and investment.

Regardless of what might be done with tax policy, I can definitely advocate for a change in the perceived moral status of the nonprofit sector. We should not elevate nonprofits to a higher pedestal than that of for-profit firms. We should stop telling our children that working for a nonprofit is in any way morally superior to working for a profit-seeking enterprise.

Arnold Kling is an adjunct scholar with the Cato Institute. The views expressed here are his own. He blogs at http://arnoldkling.com/blog.

FURTHER READING: Kling also writes "Congress Should Promote Charter Schools," "GDP and Measuring the Intangible," "The Recipe for Good Government," and "Fantasy Despot Syndrome and Healthcare.gov."
 
 Footnote
1.    Jonathan Bush and Stephen Baker, Where Does it Hurt?: An Entrepreneur's Guide to Fixing Health Care, p. 87

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